Where’s Colonel Sanders When You Need Him? Yum’s Earnings Disappoint

Yum Brands (NYSE:YUM) reported results after the bell Tuesday for its third quarter that ended September 7, 2013, revealing that the Louisville, Kentucky-based company’s net revenues fell 2.89 percent on the year to $3.47 billion, missing analyst expectations of $3.52 billion. In 2012′s third quarter, Yum posted a $3.57 billion figure.

Earnings per share also decreased 15 percent on the year to $0.85 per share, down from 99 cents per share excluding Special Items, and those failed to meet expectations of $0.92 per share.

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Prior to the earnings release, investors were especially interested to learn how the parent company of KFC and Taco Bell fared in China, because Yum depends on the Asian country for almost half of its profits, despite its greater outlet presence in the U.S.

The company, however, revealed Tuesday that same-store sales in China fell 11 percent in the third quarter, and that is attributed to a slowing Chinese economy and food safety scare that Yum has now consistently suffered the effects of. Analysts had the decline pegged at a 10.5 percent fall. However, they only expected YUM’s China comp sales in September to fall 5.7 percent, while they ended up declining 11 percent. In addition, worldwide system sales grew 1 percent prior to foreign currency translation, and that includes 5 percent growth at Yum Restaurants International. System sales declined 2 percent in China and were flat in the U.S.

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Despite the poorer-than-expected third quarter results, Yum CEO David Novak maintained confidence in Yum Tuesday and offered his company’s revised guidance for the future explaining, ”I remain as confident as ever in our ability to deliver strong, sustainable growth in the years to come. Given a slower-than-expected sales recovery at KFC China and a higher-than-expected tax rate, we are now estimating a high-single to low-double-digit percentage decline in full-year EPS versus prior year, excluding Special Items.

“Our revised full-year EPS outlook is obviously well below our 11-year track record of double-digit growth through 2012. We also recorded a significant non-cash Special Item charge for the write-down of Little Sheep intangible assets. Little Sheep remains the number-one brand in China’s largest casual dining category, and we remain committed to this concept as an engine of future growth.”

In addition, in regards to the weak growth in China that investors watch for indicators on the health of the Chinese consumer, Novak insisted, “Even with our recent challenges, KFC is unquestionably the category leader in China and we remain confident sales will fully recover from the adverse publicity surrounding the December poultry supply incident. Our Pizza Hut business in China continues to deliver strong results, and the rest of Yum is performing generally as expected for the full year. I’m pleased with the strong margin performance in China in the face of significant sales deleverage, along with the fact that Taco Bell has produced seven consecutive quarters of positive same-store sales growth.”

Following the third quarter earnings release, Yum’s shares plummeted 7.99 percent in after hours trading to $66.30 as of 5:15 p.m. Tuesday, and that reflects significant investor concern that the Louisville-based company will be unable to curb the trend of losses after six straight months of sales declines. Shareholders were counting on a third-quarter comeback for Yum to prove that it could resurrect success in China — its main market but one which has presented obstacles as of late thanks to food-safety scares — however, given the consistent decline of sales in China, Yum might now need to reconsider its massive expansion plans in the country.

In addition, Yum restaurants still compete bitterly with competitors like McDonald’s (NYSE:MCD) and Burger King (NYSE:BKW) in both China and the U.S., and analysts now are forecasting at least modest sales increases for both fast food corporations, complicating Yum’s future forecasts even further. Analysts are now revisiting their expectations for KFC’s parent company, and they might need to reconsider Yum’s future prospects after its first negative earnings surprise in over four quarters.

Don’t Miss: China Doesn’t Find Yum Brands So Yummy.